Financial review

In compliance with Financial Reporting Standard 102, the Society’s financial statements have been consolidated with those of the Scottish Solicitors’ Guarantee Fund for the first time (and again with those of Law Society of Scotland (Services) Limited) and presented as group financial statements. The statutory basis, day to day management and governance oversight of the SSGF is unaltered by consolidation which is essentially about presentation of the Society group year-end financial statements in accordance with FRS102. The SSGF is included within the consolidated financial statements in recognition of the Society exercising control over the management, governance and operation of the fund.

It should be noted that, as required by statute, all income received by the SSGF is legally ringfenced to meet only future claims and therefore not available under any circumstances for the Society’s use. Similarly, the reserves of the SSGF are legally designated for that purpose and do not under any circumstances form part of the Society’s free reserves. However, control of the SSGF is bestowed on the Society by law, and, more widely, the SSGF is considered to be of benefit to the Society in helping underpin the positive reputation of the profession. Comparative figures for 2017 have been adjusted to incorporate the SSGF.

The Group (as defined above) reports a loss (prior to the actuarial adjustments to the closed final salary pension scheme liability) of £87,000 for the financial year ended 31 October 2018 (2017 - £5,000 loss). This comprises the following components:

The Society reports a loss (prior to the actuarial adjustments to the closed final salary pension scheme liability) of £312,000 for the financial year ended 31 October 2018 (2017 - £59,000 loss). Further detail of the Society’s financial performance is given in the Income Statement on page 18 (full accounts below).

The biggest fluctuation between 2018 and 2017 was in the performance of the investment portfolio. The loss against the previous year’s market value for the portfolios held by the Society was £96,000 (around 4%). In 2017 the equivalent figure was a gain of £277,000. These investments are held for the long term, and produce an income of around £80,000 per annum, so will be subject to market volatility.

Looking ahead, Council is aware of the need to avoid any structural deficit. The increase in the Practising Certificate subscription for 2018/19 is aimed at restoring the Society to at least a break-even position for the year to 31 October 2019. Within the 2018/19 budget is a modest contingency sum to deal with unanticipated expenditure requirements during the year.

The following section refers to the Society’s figures alone.

Income for the year was £11.0 million, an increase of 0.3% from the previous year. Income is analysed as follows:

Membership income comprises Practising Certificates, Retentions and Non-Practising Member fees. Other Core Income comprises fees from regulatory activity. This includes the Scottish Solicitors’ Guarantee Fund Accounts fee paid by firm principles towards financial compliance and interventions, recovery of costs awarded to the Society by the Scottish Solicitors Disciplinary Tribunal, and commission and recoveries from Judicial Factories.

Income was lower than 2017 due mainly to two factors – Commission and recoveries from Judicial Factories were unusually high in the previous year following recoveries from two large cases, and Investment Income in 2017 included a special dividend of £261,000 from Legal Post (Scotland) Limited immediately prior to the sale of the investment in the company.

Expenditure (excluding actuarial movements in closed pension scheme and the valuation movement of investments) was £11.2 million, the same as in 2017. Expenditure is analysed as follows:

Cost control in certain areas enabled more resource to be allocated to regulation. The principal reductions in expenditure came from two sources. In 2017 a one-off charitable donation of £261,000 was made to the Law Society of Scotland Educational Foundation from the special dividend received from Legal Post, and Guarantee Fund claims fell by £308,000 compared with the previous year.

Cash balances for the Society and its subsidiaries at the year-end were:

The principal factors in the decrease in the Society’s cash balance were a Council decision to invest a special contribution of £1m towards the closed final salary pension scheme deficit, investments purchased from uninvested cash held at the previous year-end, and a reduction in subscriptions received in advance at the year-end (recovered in November).

Markets were affected by BREXIT uncertainty and as a result the Group’s investment portfolio showed a loss against the market value at 31 October 2018 of £230,000 (2017 – gain of £509,000), equating to approximately 3.7% of investments held. The Finance sub-committee monitors investments at least quarterly and reserves are diversified to enable investments to be held over the long term (defined as 5-10 years). The balance of cash and investments held is monitored. Fluctuations in investment values are accepted and the portfolio produces a much higher dividend yield than achieved by interest rates on deposits.

The Society is responsible for a defined benefit pension scheme which was closed to future accrual from 1 May 2010. The most recent full actuarial valuation was carried out at 31 March 2016 by a qualified actuary, independent of the scheme's sponsoring employer. The next triennial valuation date is 31 March 2019.

The overall deficit shown by this valuation was £1,722,000 with the value of assets covering 78% of the value of the liabilities. A deficit recovery repayment plan has been agreed with the scheme trustees which resulted in contributions of £170,000 per annum plus a one-off payment of £1,000,000 to the Scheme made during the financial year. In addition, the Society meets the scheme running costs as they fall due. These contributions are designed to remove the deficit by 31 March 2021.

Financial Reporting Standard 102 applies less prudent assumptions than those in the triennial actuarial valuation (as explained in note 13). Consequently, the majority of sums paid to the scheme this year have resulted in a reduction in reserves as the FRS102 valuation resulted in a surplus. The valuation surplus is not carried as an asset in the financial statements as the Society does not have an automatic right to any surplus funds remaining at the cessation of the scheme.

At 31 October 2018 there was no scheme deficit for financial reporting purposes (2017 – deficit £277,000). This change is due the contributions paid by the Society into the Scheme in the year.

The Society’s reserves fell from £6.89m to £5.65m in the year under review. The principal reason for this reduction was an accelerated contribution of £1m to the Society’s closed final salary pension scheme, in line with the recovery plan agreed with the Trustees following the 2016 actuarial valuation. The actuarial movement in the scheme resulted in a charge of £901,000 (2017 – £665,000 credit), giving a total recognised deficit for the year of £1.213m (2017 – recognised surplus £800,000). Closing free reserves of the Society were £5.65m.

Reserves held by the SSGF are legally designated solely for the purposes of the fund and are not under any circumstances available to the Society. At 31 October 2018 the SSGF reserves were £5.96m (2017 - £5.72m).

The Society’s policy for free reserves (excluding designated SSGF reserves) is to hold between 3 and 6 months’ average expenditure for the Society. Reserves for this purpose are calculated as follows:

Reserve levels are monitored by the Society’s Finance sub-committee at least quarterly. The sub-committee regards this level as reasonable and is seeking a break-even financial performance in 2018/19. In setting reserve targets the committee also recognises the remaining operating lease commitment for the rent of the Society’s premises (note 16), as reflected in future cash flow projections.

The Society is the professional body and regulator of Scottish solicitors. It has responsibility for promoting the interests of the solicitors’ profession in Scotland and the interests of the public in relation to the profession. The Society’s responsibilities as a professional body and regulator are overseen by both its Council and its Regulatory Committee. The Council consists of up to 48 seats, of which 31 are elected solicitor members, up to nine lay members, eight co-opted solicitor members, and such ex officiis members as may be required.

The Society is a statutory body governed by the Solicitors (Scotland) Act 1980 with a Constitution made under that Act and accompanying standing orders. The Society is committed to the principles of good corporate governance and seeks to comply with the relevant parts of the 2018 UK Corporate Governance Code where it is practicable given the Society’s scale and operations.

The Society’s governing body is the Council which sets the overall strategy as well as the annual corporate plan and associated budget. The Council has put in place an  ambitious  five year strategy entitled “Leading Legal Excellence” which is due to be delivered by 2020. The Council manages the overall strategic direction for the Society within the context of the annual operational  plan and annual budget. The Council also measures the Society’s performance against the annual operational  plan within the context of the Society’s longer term goals set out in the current  five year strategy. The Council delegates the monthly oversight of the Society’s implementation of the operational plan to the Board. The Board is chaired by the Society’s President and is made up of the Vice President, Past President, Treasurer and five other elected Council members. Sitting beneath the Board is the Chief Executive, the senior leadership team and management team, who all work together to implement the annual operational  plan, deliver the five year strategy as well as managing the Society on an operational basis.

There are a number of checks and balances within the Society’s governance model which seek to ensure an appropriate and fair discharge of the Society’s statutory responsibilities as a professional body and regulator. These checks and balances include the monthly reporting of progress on the implementation of the annual operational  plan to the Board and the Council. The oversight of the regulatory duties of the Council is discharged by the Regulatory Committee through a delegated authority scheme in conjunction with the various Regulatory sub-committees and the Society’s employees.

The Society’s Audit Committee has, as one of its main roles, responsibility for reviewing and making recommendations on the Society’s internal control and risk management systems, in order to monitor and assess the effectiveness of those procedures and management and reporting systems. The Convener of the Audit Committee reports quarterly to the Council on these matters as well as to the members at the Annual General Meeting. The Audit Committee also benefits from the provision of internal audit services provided by Wylie & Bisset CA.

The Society also has a Finance Sub-committee chaired by a Council member who is the Society’s Treasurer. The Finance Sub-committee has responsibility for producing and then presenting the annual budget for approval by the Council. The Finance Sub-committee also proposes the annual practising certificate subscription, first to the Council and then to members for approval at the annual general meeting in May. There is also a Nominations Committee chaired by a Council member, which oversees the system for the appointment of members to the Society’s committees as well as making recommendations for the appointment of the Conveners for such committees.

The Governance Working Party established by the Council and chaired by Council member George MacWilliam reported its findings in April 2018.The Council accepted the Working Party’s principal recommendations which included an overhaul of the remits of all the representative committees. The delegated powers schedule for all the representative committees was revised and updated.

The Public Policy Committee is now in its second year of operation. Its modus operandi is now well established. This committee replaced the former Law Reform Committee which has been stood down. The principal role of the committee is to oversee all the public policy work of the Society and to ensure that it is in line with the Society’s five-year strategy.

The Society has three Office Bearers: the President (who is the Chairman of the Society), the Vice President and the Past President. Each of these three Office Bearers take office for one year. The Vice President becomes President with the handover taking place at the Council meeting in May. The Office Bearers together with the Chief Executive are the Society’s main ambassadors and represent the Society at home and abroad.

The Chief Executive’s key responsibilities include the provision of leadership and the vision necessary to create a professional body which effectively regulates and represents the interests of its members and delivers a range of services and products as required by the profession. The Chief Executive is responsible for advising the Council and the Board on the development and implementation of policy as well as managing the Society’s staff and resources. The Chief Executive works alongside the Office Bearers and Council in providing effective and meaningful communications and representing the Society. Additionally, the Chief Executive is responsible for ensuring effective relationships with members, external bodies (including governments) at the highest level and internationally, and with all other appropriate third parties, the public and the media. The Chief Executive is also responsible for ensuring that the respective parts of the Society’s governance structure operate effectively and efficiently.

The Council’s responsibilities are set out in statute, the constitution and the standing orders. The principal role of the Council is to approve the strategy, annual corporate plan and the annual budget for the Society. The Council also sets the most significant fees for members as well as recommending the practising certificate subscription for members to consider at the autumn special general meeting. There is also a Code of Conduct which sets out the standards of behaviour for Council members. The Chair of the Council is the President. Greater details of the Society’s governance arrangements are available on the Society’s website.

The principal roles of the Board are –

• to provide guidance to the Society’s executive on initial drafts of strategy and the annual corporate plan which will include resource plans before their submission to the Council for approval
• to provide direction to both the executive and committees on any strategic level initiative or project before submission to Council for approval
• to monitor the quarterly performance of the Society against its targets contained in the annual corporate plan and report any major variance to Council
• to regularly monitor the Society’s financial performance against budget and to ensure that all risks identified in the Society’s risk register are managed and escalated to Council for those which the Board consider to have the potential  to have a high impact on the work of the Society, and with  a medium to high likelihood of occurring

The principal roles of the Regulatory Committee are –

• to ensure that the standards for the profession are set by way of making relevant and appropriate rules, to be applied in a uniform and consistent way and regularly reviewed
• to ensure that the internal processes, policies and procedures adopted by the Regulatory sub-committees are effective, appropriate and proportionate in order to ensure the making of consistent regulatory decisions and to build and develop relations with appropriate third parties to ensure confidence in the work of the profession and the Society’s regulatory regime